We participated in a conference call with the management of CCM on its 2Q20 results. While volumes and demand for products related to the glove sector has improved, ASP has only increased by less than c.5% on average due to the competitive nature of the market. Caustic soda ASP is expected to remain weak going into 2HFY20. However, we are positive on its expansion plans and cost optimization plans going forward. Maintain HOLD at TP of RM1.30 based on 12x FY20 EPS. We believe that caustic soda ASP needs to recover for us to warrant a re-rating on CCM.

The Following Are the Key Takeaways From the Post Results Briefing:

Recap. 2Q20 core loss of -RM0.7m (QoQ: RM2.8m, YoY: RM3.2m) and 1H20 core profit of RM2.5m (-71.5% YoY) was below expectations, constituting 13% of our forecast due to softer chemical margins as a result of lower ASP and utilization for its caustic soda division.

ORICA. Results were dragged by share of losses by associate, ORICA which recorded a loss of -RM2.4m in 1H20 as it only resumed operations in May 2020.

Chemical segment performance. Margins were mainly affected due to the MCO. Utilisation for its PGW2 plant was at 100% in 1H20 while its PGW1 plant was only at 52% utilisation. CCM foresees its PGW1 plant utilisation increasing to 75% in 2H20. The increase in revenue in 2Q20 can be attributed to its 15,000MT sale of caustic soda to Pengerang Integrated Complex (PIC).

Caustic Soda. ASP for caustic soda (44% of group revenue) was down 12% YoY in 2Q20 at about USD280-300/DMT, from about USD300/DMT in Jan. CCM expects to see its price decreasing to about USD265-270/DMT in 2H20 primarily due to weaker demand coming from India and Indonesia. Most integrated chemical players are also selling it to the export market, bringing ASP down. Ethylene prices are very low of late and integrated players are vying for a higher net back on its vinyl chain and are increasing its production to have more feedstock for the chlorine market, which comes in hand in hand with the production of caustic soda. CCM expects the chemicals segment is expected to be in the black in 2H20. The ramp up in production by Lynas should be the main contributor towards PGW1’s expected improvement in utilisation.

Polymers. Polymer ASP has increased by c.8% YoY but its ASP is only expected to increase by about 2-3% in 2H20 relative to 1H20 as the Company’s main focus is to gain market share. Lower QoQ performance for polymer sector was mainly attributable to stock take adjustments amounting to c.RM0.5m. Polymer division performance would be flat QoQ after removing the aforementioned item. Polymer sector contribution is expected to improve in 2H20 through higher orders from Thailand.

Glove related products. CCM saw volume increases across most segments related to the glove sector. 1H20 revenue for polymers increased by 18% YoY while cleaners improved by 32% YoY. 1H20 Calcium Nitrate (CN) volumes increased from 1000 MT/month in Jan to about 1500 MT/month currently and is expected to reach maximum capacity at 1900MT/month in 2H20 while ASP has increased by about 2-3% YoY. Nitric acid volumes have increased by more than 100% while ASP has only increased by about 2-3% YoY. Chlorine prices (c.15% of chemical revenue and c.10% of group revenue) were only RM1000/MT in the beginning of the year, and it has increased to about RM1200/MT, and is expected to trend at around RM1400/MT in 2H20.

Orderbook visibility for glove related products. Order visibility is only one month for glove sector for chemicals segment and 3 months for polymers due to the competitive nature of the industry.

Future plans. CCM will focus on cost and operational efficiency to improve on its earnings. Its Cogen plant is expected to come on stream in 1Q20 and is expected to result in RM6m of cost savings (mainly from electricity) annually. CCM is also expanding on its cleaners segment. Current capacity for its cleaners segment is 9,000 mt/year and its extra capacity of 18,000 mt/year is expected to come on stream in May 2021.

Outlook. We expect to see higher sales volumes in 2H20 from higher utilization and sales volumes from PGW1 plant and we expect 2H20 chemical segment performance to improve relative to 1H20. We believe that its PGW1 reactivation would offset continued weaknesses in ASP for its caustic soda segment. We also expect the performance of its polymer division to improve in 2H20. However, we do not foresee an exponential increase in its earnings based on its polymer division alone as its polymer division is very competitive with minimal product differentiation and low barriers to entry. Its polymer division ASP has only increased by an average of <c.5% in 2Q20 as compared to its glove counterparts, which saw its OEM ASPs increasing by c.5-8% MoM since Apr. We also believe that the introduction of its Cogen plant will be able to offer the Company some cost savings.

Forecast. We keep earnings unchanged for FY20-21 as we expect the chemical segment to remain weak due to low caustic soda prices. We did not factor in its potential cost savings coming from its Cogen plant in FY21 to be conservative as we believe that there could be further delays towards the commissioning of the plant due to Covid-19.

Maintain HOLD, TP: RM1.30. Maintain our HOLD call with TP of RM1.30 based on 12x FY20 EPS as we believe that caustic soda ASP (c.44% of group revenue) would need to improve for us to warrant a re-rating on our call

Source: Hong Leong Investment Bank Research - 26 Aug 2020